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A R&D Based Real Business Cycle Model

  • Fung, Ka Wai Terence
  • Lau, Chi Keung Marco
  • Chan, Kwok Ho

The New Keynesian Real Business Cycle model with staggered price adjustment is augmented with a R&D producing sector. Two sources of economic shocks are considered, namely random paritcipation (perturbances to value of alternative investment opportunities in another sector) and financial intermediation (shocks to the cost of raising capital in the financial intermediation market). We find that, when comparing to the baseline model, both models can explain pro-cyclical R&D spending. Additionally, the investment oversensitivity problem is corrected. However, only the financial intermediation model is consistent with the observed finding that volatility of R&D is larger than that of investment and output.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 52571.

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Date of creation: 2013
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Handle: RePEc:pra:mprapa:52571
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